Top Chinese Securities Firms to Merge as State Calls for Consolidation

The proposed merger of two Chinese securities firms, Guotai Junan Securities Co. Ltd. and Haitong Securities Co. Ltd., aims to create the largest brokerage in China amid government efforts to develop internationally competitive investment banks [para. 1]. The merger, announced Thursday, follows months of speculation and is pending approval from regulatory authorities, as well as the companies' boards and shareholders [para. 2]. The merger will involve a stock swap where Guotai Junan will issue new shares to Haitong shareholders in Shanghai and Hong Kong and also raise extra funding through additional share issuance in Shanghai [para. 5].

If successful, the combined entity would hold assets worth 1.68 trillion yuan ($237 billion), surpassing Citic Securities Co. Ltd. to become China’s largest securities firm by assets [para. 6]. Despite this, the new company will still be significantly smaller compared to global firms like JPMorgan Chase & Co., Goldman Sachs Group Inc., and Morgan Stanley [para. 7]. Analysts from Morgan Stanley believe the merger could elevate investor interest in brokerage stocks temporarily and assist the industry in rebalancing amidst regulatory tightening and challenging capital market cycles [para. 8].

The Chinese government's call for consolidation in the brokerage sector stretches back over a decade. In 2005, the State Council encouraged sustainable companies to engage in mergers and acquisitions while prompting weaker firms to restructure [para. 10]. A 2008 state policy limited entities to controlling stakes in only one securities firm, spurring a wave of M&A activities [para. 11]. These consolidations have historically been driven by government policies rather than market needs [para. 12]. The recent uptick in the sector’s consolidation activities in 2023 largely involved small and mid-sized firms dealing with internal governance or debt crises amidst a stock market downturn [para. 13].

The Central Financial Work Conference in October reaffirmed the commitment to "foster first-class investment banks" [para. 14]. This was followed by the China Securities Regulatory Commission (CSRC) pledging support for leading securities firms to undergo restructuring or mergers [para. 15]. In March, the CSRC set forth guidelines aimed at establishing top-tier investment banks within about five years and envisaged forming globally competitive investment institutions by 2035 [para. 16]. As of July, China had 121 licensed securities firms [para. 17].

Executing mergers in this sector is fraught with challenges, primarily investor resistance due to ownership changes. Often, shareholders are local government entities that are reluctant to relinquish control [para. 19]. Unlike other firms, Guotai Junan and Haitong both have backing from the Shanghai government, alleviating such concerns [para. 20]. Another hurdle is the lack of business differentiation among brokerages [para. 21]. However, sources suggest that Guotai Junan and Haitong complement each other with variations in management teams and areas of business focus. Guotai Junan has a national presence, while Haitong is more regionally focused on Jiangsu and Zhejiang provinces [para. 23].

Despite these complementary aspects, merging the strengths of the two firms effectively remains a contentious point [para. 26]. A senior brokerage executive pointed out that the actual integration of personnel, institutions, and assets could be a formidable challenge [para. 27].